Repo Rate Unchanged: What does it mean for the Common Man?

Friday, Feb 23 2018 Source/Contribution by : NJ Publications

In it's 6th and the last of this fiscal's bi-monthly monetary policy review, RBI kept the Repo rate unchanged at 6%, three times in a row, announced on 7th Feb 2018. What does it mean for the common man?, is the question to be answered in the following passage. But before moving on to the impact of the rate, let's understand what does Repo rate mean?

So, Repo Rate is the rate at which RBI lends money to commercial banks, generally against government securities. Repo Rate is used by the Central Bank to control the level of inflation in the country. When the Repo rate is low, banks get money at cheaper rates and consequently the lending rates also fall, which leads to increased supply of money in the economy thus accelerating inflation; and vice versa, the Repo rate is increased when the inflationary pressure is high in the economy.

Now we have some key takeaways from this Monetary Policy Review for the common man:

> Inflation: The retail inflation accelerated to a 17 month high of 5.21% in the month of December 2017. The RBI has raised its forecasts for CPI inflation to 5.1% for the March quarter and to 5.1-5.6% for the first half of FY 2019, before stabilizing to around 4.5-4.6%.

> Loans: The interest rates have taken the downward staircase since the last 3 years, and a stable repo rate means they aren't changing course any soon. Low and constant Repo rate means it's an opportunity for prospective home buyers as they can continue to avail loans from banks at cheaper rates.

> Deposit Rates: Like Lending rates, deposit rates are also caught on the downward trend. 1 year Fixed Deposit rates have fallen from the 8.5% range to a mere 6.5% range from 2014 to 2017 for all major banks, and apparently the scenario for the upcoming months also look muted. Similar is the plight of other traditional investments like PPF, NSC or fixed deposits with shorter or longer investment periods.

In light of the above situation, it may not be wise to keep your money in banks or other low interest bearing instruments.

- Liquid Funds for parking your savings: It'll be a better bet to park your extra cash or Emergency money in Liquid Mutual Funds, than letting them sit in your savings account for a meagre 4%. Liquid Funds can fetch you better returns than your savings account, plus it offers high level of liquidity also. In some funds, you can get your money in your bank account within 30 minutes of placing the redemption request.

- Short Term debt funds for lower horizon investments: When you have a short investment horizon of around 3 years, Short Term Debt Mutual Funds offer a better alternative to Fixed Deposits or other traditional investments, by offering marginally better returns as well as by offering indexation benefit which significantly reduces the investor's tax liability on capital gains.

- Equity Mutual Funds for longer term investments: After the recent announcement of Long Term Capital Gains Tax on returns from Equity, in the Union Budget this year, investors are skeptical about Equity. Just to put this into perspective, the tax will be levied at a modest rate of 10% and that too on the returns earned over Rs 1 lakh. So, if the returns from your Equity MF investment are 15%, 13.5% is still yours. Hence, Equity continues to remain an attractive investment option for long term investing, because of substantially higher returns than all other asset classes even after providing for taxes.

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